Signs of a Retail Rebound as Consumers Take On More Debt

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Shoppers at Macy’s Midtown Manhattan flagship on Black Friday. The department store’s stock price has been pummeled since July, and loan-fueled spending could help lift the company’s fortunes.CreditDina Litovsky for The New York Times

By Norm Alster

Jan. 15, 2016

Consumer debt is rising. How Americans handle that load and how much cash they spend will determine the fortunes of an important stock sector.

Stocks that benefit from consumer spending — including those in categories like autos, home furnishings, retailers and restaurants — have been very strong performers recently. Over the three years through December, consumer discretionary stocks returned more than 18 percent annually, on average, according to S&P Dow Jones Indices.

But what does the future hold for this sector? On the positive side, unemployment rates continue to decline, wages have grown modestly among lower-income earners, and plummeting energy prices have given consumers more spending firepower.

Consumer debt, however, has been inching back up after contracting for years. At the end of the third quarter it totaled $12 trillion, according to the Federal Reserve Bank of New York. It peaked at $12.68 trillion in 2008, but dropped during a wave of foreclosures. Since late 2013, however, consumer borrowing again has been rising.

Recent data also show that defaults on various types of consumer loans have been ticking up. Default rates on bank cards, first mortgages and auto loans rose in November, according to the S&P/Experian Consumer Credit Default Indices.

Consumer debt cuts both ways, of course. In moderation, it can help encourage economic activity. Carried too far, it can create bubbles that threaten the economy. Some analysts say debt is still in the helpful stages and consumer spending therefore has room for nontoxic growth. “We still see the consumer leading economic growth,” said Sam Stovall, United States equity strategist with S&P Capital IQ. He predicted consumer spending would grow 3.1 percent in 2016, spurred by gains in jobs and wages.

Jay Nogueira, head of the global consumer sector for T. Rowe Price, was cautiously bullish about the consumer discretionary sector. Credit card debt per household is $6,900, he said, placing it only at 2004 levels, well below the 2007 peak of $8,600. In addition, he said, “Housing is set up for a long and steady recovery, as opposed to boom and bust.” He favors stocks like Home Depot, Williams-Sonoma, Whirlpool and Mohawk Industries.

One argument for a continuing housing rebound comes from Brad Sorensen, head of market and sector analysis for the Schwab Center for Financial Research. Homeownership peaked before the financial crisis at 69 percent, he said, and has fallen to about 63 percent. There is room for growth, he said.

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Shoppers at a Home Depot store in Manhattan. Access to loans could encourage homeowners to invest more in their properties.CreditChristian Hansen for The New York Times

But even bulls on consumer spending see areas of concern. For example, auto lending has emerged as a highly profitable area for banks, and just about anyone can get a car loan these days, said Ernesto Ramos, head of equities for BMO Global Asset Management. “Once you walk into a showroom, money will be no object,” he said.

Similarly, Mr. Sorensen warned: “The standards have loosened, and all people are able to get loans. They are letting the weakly creditworthy get loans.”

Mark Hamrick, senior economic analyst with Bankrate.com, said only a small fraction of auto loans were made at the zero percent interest rates trumpeted on television. In an auto showroom recently, he said, a salesman told him that at that moment the dealership was negotiating several loans at “20 percent or above.”

Still, auto loans are not that big, in aggregate, compared with housing debt. Statistics from the Federal Reserve Bank of New York show that auto loans increased by more than 12 percent from the third quarter of 2014 to the third quarter of 2015. That left the total of auto credit at $1.05 trillion, a small fraction of the more than $8 trillion of mortgage debt.

Also of concern for the consumer sector, some large retailers have had disappointing performances recently. Among the worst hit was Macy’s. Its stock has fallen to roughly $35 a share from a mid-July peak above $70.

Barbara Miller, a portfolio manager with the Federated Kaufmann fund, sees “more competition from Internet sites” as a major factor. To keep up with Internet rivals, she added, department stores must also increase spending on technology, further deflating results.

Mr. Nogueira of T. Rowe Price said the sell-off had gone too far. “I think it’s an overreaction,” he said. One big reason for poor sales at Macy’s and other chain stores was the warm November and December weather, he said. Macy’s has also been hurt by the strong dollar, which has depressed its traditionally robust tourist business.

The level of prevailing interest rates will affect consumer spending, but the impact of the Federal Reserve’s recent increase in short-term rates is far from clear. Mr. Stovall said that even if the Fed continued to raise rates, they were likely to remain very low for some time.

It is even possible that if inflation increases as the Fed expects, real interest rates will lag, essentially giving consumers negative inflation-adjusted interest rates down the road. That would be good news for borrowers and for an economy that depends on hefty but manageable consumer debt. “Consumers will be leading the way in economic growth,” Mr. Stovall said. Investors in the consumer discretionary sector will certainly hope so.

A version of this article appears in print on , on Page BU14 of the New York edition with the headline: Signs of a Retail Rebound as Consumers Take On Debt. Order Reprints | Today’s Paper | Subscribe

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